Pound US Dollar (GBP/USD) Exchange Rate Tumbles as US Inflation Picks Up

Modified: Monday, 30 April 2018 15:05 BST - Written by John Cameron

STORY LINK Pound US Dollar (GBP/USD) Exchange Rate Tumbles as US Inflation Picks Up

The Pound US Dollar (GBP/USD) exchange rate struck a new three-month low on Friday as investors reacted to the latest US inflation figures.

US Dollar (USD) Exchange Rate Strengthens as Inflation Picks Up

The US Dollar (USD) continued to pressure the Pound (GBP) at the start of this week’s session on the back of some better-than-expected domestic inflation figures.

According to data published by the US Commerce Department PCE Price index climbed 2% in March, up from 1.7% the previous month and falling in line with market expectations.

More notable however was the accompanying core inflation figures, which after stripping volatile food and energy items still jumped 1.9% in the three months to March.

As the Federal Reserve’s preferred measure of inflation a lot of attention is given to the PCE Price index.

However analysts suggest that this uptick is unlikely push the US central bank into seek to plot a more aggressive path of monetary tightening at this time, despite moving within the Fed’s target of 2%.

This is partly due to the minutes from the Fed’s most recent policy meeting in which a rise in inflation was not expected to be enough on its own to ‘justify a change in the projected path’ for the bank’s inflation rate policy.

CME Group’s FedWatch tool currently forecasts the Fed is likely to wait until its June policy meeting before voting for the next rate hikes.

Pound (GBP) Exchange Rate Weakened by Fears of Government Instability

Meanwhile Sterling continues to edge lower at the start of this week’s session as the resignation of the UK Home Secretary, Amber Rudd prompted concerns over the stability of Theresa May’s government.

Rudd decision to resign comes amid growing criticism over her handling of the Windrush scandal and her admission that she may have ‘inadvertently misled’ MP over the extent of her knowledge of deportation quotas within the Home Office.

Her departure has unsettled markets who fear that the loss of a key ally for the Prime Minister and a prominent Remainer from her cabinet could tip the balance within government to those who favour a hard Brexit.

This has extended the Pound losses in the wake of last week’s heavy sell-off after some lacklustre GDP figures revealed that the UK economy only grew 0.1% in the first quarter of 2018.

Sterling was left significantly weaker on Friday following the release of the growth figures, with analysts suggesting that this will have weakened the case for the Bank of England (BoE) to raise interest rates next month.

Ned Rumpeltin, strategist at Toronto-Dominion said last week;

‘The softer-than-expected 1Q GDP report has added to market doubts the Bank of England will be able to hike at its May meeting’

GBP/USD Exchange Rate Forecast: Can Upbeat PMI Figures Help to Revise Sterling?

Looking ahead the GBP/USD exchange rate may be in for further turbulence during this week’s session as the UK publishes its latest PMI readings.

Following on from the UK’s underwhelming first quarter GDP figures markets are likely to pace close attention to the PMIs as they well grant the first look at how the UK economy is faring at the start of the second quarter.

This could see the Pound be met by a further sell-off if the UK’s private sector remained subdued in April.

Meanwhile the focus for USD investors this week will undoubtedly be on the Fed’s next rate decision.

While the Federal Open Market Committee (FOMC) is not expected to alter its monetary policy in May after voting to raise interest rates back in March there are hopes that the US central bank may be a little more hawkish in its outlook this week.

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TAGS: Pound Dollar Forecasts